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REI/2269/06/04

Willis Limited, Registered number: 181116 in England and WalesRegistered address: Ten Trinity Square, London EC3P 3AX

Lloyd’s Broker and Member of the General Insurance Standards Council

Lloyd’s Review OMMQ

ContentsIntroduction 1Executive summary 2Global results and forecasts 3Capitalization 13Trends in capacity 16Lloyd’s Franchise implementation 24Regulatory and accounting environment 27Ratings 30Equitas 33

Appendices1. Syndicates active for 2004 year of account 352. Incidental syndicates 373. Cessations, mergers and new syndicates 384. Capacity and alignment of managing agents 395. Lloyd’s top 20 capital providers 406. Market activity 2003 – 2004 417. Capital Structure 438. Equitas 45

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© Copyright 2004 Willis Limited All rights reserved : No part of this publication may be reproduced, stored in a retrieval system, or transmitted inany form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the permission of Willis Limited. The informationcontained in this report is compiled from sources we consider to be reliable; however, we do not guarantee and are not responsible for its accuracy.This report is for general guidance only and action should not be taken without obtaining specific advice.

Willis ReReReReRe Lloyd’s Review 1

Introduction

The Lloyd's franchise continues to evolve as Lloyd's movesaway from its traditional role of market supervisor to a pro-active manager of a commercial franchise. Lloyd's seniormanagement team has driven forward with a range ofinitiatives in the past year centred on the ultimate goal ofcreating a commercial environment where the long-termreturn to all capital providers is maximised.

Lloyd's strong return to profitability and the attractiveunderwriting conditions, affords Lloyd's management witha window of opportunity to invest time and resources increating a disciplined marketplace of well-managed,independent businesses. Significant progress has beenachieved by Lloyd's management in the past year, and themarket appears well placed to continue with the momentumgenerated for further reform. The challenge for Lloyd's willbe to proactively manage the franchise and avoid theextremes of underwriting ill-discipline of a small number ofbusinesses, that in the past caused significant damage toLloyd's central resources and brand. Against a backgroundwhere underwriting conditions in most classes of businessare beginning to weaken, the acid-test to the Lloyd'sfranchise system will be to deliver profitability over theunderwriting cycle, and not micro-manage Lloyd'sindependent business to the extent that Lloyd's renownedentrepreneurial sprit, innovation and flexibility aredestroyed.

This review seeks to identify and comment upon someof the key trends and developments at Lloyd's during thepast year, and to give a brief insight into the state of themarket in 2004.

2 Willis ReReReReRe Lloyd’s Review

Executive summary

– Lloyd's underwriting capacity for 2004 is a record highat £14.96 billion, albeit marginally larger than theopening figure in 2003. Lloyd's forecasts capacity tocontract in subsequent years, as it expects underwritersto focus on profit rather than maintaining market sharein the next downturn in the underwriting cycle.

– At £1.9 billion, Lloyd's profit in 2003 on a pro-formaannual accounting basis represented a more thantwofold increase on the figure achieved in 2002. Lloyd'scombined ratio for 2003 improved to 90.7 per cent,down from 98.6 per cent in 2002. This result wasachieved in spite of a further charge for adverse lossreserve development for US casualty business for years1997 to 2001.

– The 2001 year closed - on a three year accountedbasis - with a loss of £2.4 billion representing 21 percent of capacity. The result was heavily influenced bylosses arising from September 11.

– Underwriting conditions remain attractive, with the2003 year seen by Lloyd's as the peak of theunderwriting cycle. Prospects for future earnings aregood, and in April 2004 Lloyd's forecast combinedprofits for the 2002 and 2003 years account in theregion of £3.5 billion.

– The Lloyd's market financial strength market ratingswere affirmed by Standard & Poor's and A.M. Best atA (Strong) and A- (Excellent) respectively. Lloyd's aimsto achieve a one-notch upgrade in its market ratingfrom both rating agencies by the end of 2005.

– The market's positive results in 2003 contributedto a further strengthening of Lloyd's balance sheet.Net resources (Lloyd's measure for shareholders'funds), rose by 35 per cent in 2003 to £10.1 billion.Lloyd's achieved its widely stated goal of increasingcentral net assets to in excess of USD1 billion byDecember 31, 2003. Lloyd's central net assets, largelycomprising Lloyd's Central Fund, increased by 39 percent to stand at £781 million as at the 2003 year-end.

– The Lloyd's franchise continues to evolve. This wasevidenced in 2003 by developments such as :– the creation of the franchise performance directorate– a more rigorous business planning process– amendment to the relevant EU directive to facilitate

the move to annual accounting, and– the appointment of a head of business process

reform.– Equitas announced its results for year ended

March 31, 2004, reporting that accumulated surplus,after tax, decreased by £67 million to £460 million,driven by the need to further strengthen asbestosclaims reserves. However, Equitas' solvency ratioimproved to 9.8 per cent from 8.7 per cent in 2003.

– In 2003 the Financial Service Authority (FSA) began theprocess to take a more direct approach in the regulationof the Lloyd's market. The FSA proposed newrequirements, which will be introduced fromJanuary 1, 2005, designed to ensure that seniormanagement at both the Corporation of Lloyd's andat managing agents focus on their responsibilities formanaging risk effectively and on the level of capitalneeded to support the risks of the insurance businesses.


Global results and forecasts

Lloyd's reported a £1.9 billion profit for 2003 on apro-forma annual accounting basis. This is an all-timerecord and more than twice the profit reported for 2002.Lloyd's stated that these results reflect a strongunderwriting environment and a disciplined approach tounderwriting by the market.

Lloyd's overall calendar year combined ratio improvedto 90.7 per cent in 2003, down from 98.6 per cent in theprevious year. This combined ratio compares favourably withLloyd's international peer group.

These positive results, coupled with last year's return toprofit, contributed to a further strengthening of Lloyd'sbalance sheet. Net resources of the Society and membersrose by 35 per cent in 2003 to £10.1 billion.

Annually Accounted 3-Year Accounted(£m) (£m)

2003 1,892 1,780 (p)2002 834 1,671 (p)2001 (3,110) (2,378)2000 (1,211) (2,397)

Note: Under annual accounts the whole of the loss for September 11 fallsinto 2001, whilst under three year accounting it is split between 2001,2000 and 1999.(p) = projection

Financial Results/Projections

Lloyd's capital and reserves2003 2002(£m) (£m) % change

Cash & investments 27,893 24,512 +14%Reinsurers' share of technical provisions 11,180 13,693 -18%Other assets 9,830 11,091 -11%Total assets 48,903 49,296 -0.8%Total liabilities 38,758 41,787 -7%Net resources 10,145 7,509 +35%

Lloyd’s vs industry 2003 combined ratio

(Cal

enda

r ye

ar c

ombi

ned

rati

o)

84

86

88

90

92

94

96

98

100

102

104

106

Bermuda (Re)insurersUS (Re)insurersEuropean primaryEuropean ReinsurersLloyd's 2003

90.7

97.2

103.3

99.2

95.5

Source: Lloyd's


2003 Result (annually accounted)Lloyd's 2003 profit on a pro-forma annually accounted basisof £1,892 million benefited from favourable marketconditions, with strong premium rates continuing, and acomparatively low financial impact on the Lloyd's marketfrom catastrophe losses.

2003 2002(£m) (£m) % change

Net earned premiums 11,711 10,669 +10%Net incurred claims (6,697) (6,652) +1%Net operating expenses (3,922) (3,586) +11%Loss on exchange (30) (401) -93%Investment return 893 804 +11%Profit on ordinary activities 1,892 834 +127%

Combined ratioCalendar year 90.7% 98.6% -8%Accident year 86.0% 92.7% -7%

Net resources 10,145 7,509 +35%Central assets 781 563 +39%

Pre-tax return on average net resources 24.1% 14.4% +67%

Key financial highlights

Lloyd's noted that aggregate insured catastrophe losses in2003 were above the long term average, and includedhurricane Isabel, a Japanese earthquake and severeCalifornian forest fires. However, Lloyd's believes a morecautious underwriting approach in the hard market resultedin a relatively modest financial impact of these losses onthe market.

Lloyd’s net catastrophe losses

Source: Lloyd's

(£ m

illio

ns)

1995

0

500

1,000

1,500

2,000

2,500

3,000

200320022001200019991998199719961994

445272

17887

408

642

206

2,663

250142


Lloyd's, in common with its peers, was not immune fromdeveloping claims in US casualty business. The 2003 resultincluded reserve strengthening of £545 million for 2001and prior years. This, combined with the last year's£625 million of reserve strengthening, brings adversereserve development recorded at Lloyd's for the 2002 and2003 years to in excess of £1 billion.

The majority of the reserve development related to UScasualty business for years 1997 - 2001, with the D&O classhaving the greatest effect on Lloyd's results. Losses such asthe corporate collapses of Enron and Worldcom, andlitigation arising from the bursting of the dot-com bubblewere cited by Lloyd's as driving the loss development in theD&O line.

Lloyd's believes that its reserve actions taken in the lasttwo years will account for the majority of reservestrengthening required for prior years. However, Lloyd's willnot rule out further minor reserve development in thecasualty sector going forward, given the unpredictability ofclaims awards in the courts, particularly in the US.

Overall Casualty Property Reinsurance Motor Marine Energy AviationAccident year 86.0% 94.8% 89.1% 84.9% 96.8% 95.6% 88.6% 94.2%Prior year reserve movement 4.7% 15.6% 0.3% 4.4% (3.2%) (5.9%) (5.2%) (1.2%)Calendar year 90.7% 110.4% 89.4% 89.3% 93.6% 89.7% 83.4% 93.0%

2003 combined ratio


The divergence of performance among syndicates indicatesthat under-performance still exists in the market. Lloyd'sreported that the top 25 per cent of syndicates in 2003achieved an annually accounted combined ratio of 77 percent, which compares very favourably with industry peers.In contrast, the bottom quartile of syndicates (includingdiscontinued businesses), produced a combined ratio of126 per cent, in spite of the strong market conditions. Thisunder-performance in the market will be a central issue forthe Franchise Board to address, particularly as theunderwriting cycle begins to weaken.

Lloyd's positive performance over the last two years hasresulted in a strengthening of the market's global assetsavailable to meet policyholders' claims. Lloyd's netresources (Lloyd's measure for shareholders' funds) totalled£10.1 billion at year-end 2003, up 35 per cent from the2002 level.

Lloyd’s performance by class of business

Source: Lloyd's

2003

cal

enda

r ye

ar c

ombi

ned

rati

os

0

20%

40%

60%

80%

100%

120%

AviationEnergyMarineMotorReinsurancePropertyCasualty

110.4%

89.4% 89.3%93.6%

89.7%

83.4%

93.0%


Reinsurance assetLloyd's traditionally high use of reinsurance supportmoderated in 2003. The percentage of outward reinsurancepremiums ceded was 25.4 per cent of GWP in 2003, downfrom 31.1 per cent in 2002. This downward trend inreinsurance purchase was also matched by a reduction inLloyd's reinsurance recoverable asset, which decreased to£11.6 billion (or 114 per cent of net resources), downfrom £13.8 billion (184 per cent) in 2002.

Lloyd's reported that 87 per cent of its reinsurance asset iswith reinsurers rated "A-" and above, with 30% of the totalasset concentrated with five top reinsurance groups(excluding Lloyd's). Lloyd's inter-syndicate reinsuranceaccounted for 14 per cent of the total asset. Lloyd's hasprovided for a bad debt provision of 7.4 per cent of thetotal reinsurance asset across the market. The total paidreinsurance debt at year-end 2003 was £1.5 billion, ofwhich 23 per cent was greater than 12 months old.

Reinsurance asset (£ millions)O/S & Total % of net

Date Debt IBNR Recoverable resourcesDecember 31, 2001 1,896 14,626 16,523 408%December 31, 2002 2,079 11,746 13,825 184%December 31, 2003 1,596 9,996 11,591 114%

Lloyd’s net resouces

(£ m

illio

ns)

0

2,000

4,000

6,000

8,000

10,000

12,000

200320022001

4,052

7,509

10,145

Source: Lloyd's


OutlookWith the exception of casualty business, Lloyd's noted thatthe tightening of premium rates and policy terms andconditions began to slow by late 2003, and acknowledgedthat 2003 will prove to be the peak of the underwritingcycle for most classes of business. Consequently, the 2004year result will benefit significantly from the flow of earnedpremiums from 2003.

Lloyd's predicts that market capacity and its utilisation willcontract from current peak levels once the insurance cyclebegins to weaken. The challenge to the Franchise Board willbe to maintain the market's focus on profitableunderwriting as opposed to maximising premium growthand market share. However, Lloyd's is confident that itcontinues to be well placed to take advantage of what arestill very attractive market conditions.

2003Calendar Year

Class of business 2002 2003 2004 Combined RatiosCasualty 100 121 130 110.4Property 100 103 98 89.4Reinsurance 100 104 102 89.3Motor 100 107 106 93.6Marine 100 115 121 89.7Energy 100 104 96 83.4Aviation 100 98 94 93.0

Premium rating index

Lloyd’s capital ratio

% (N

et r

esou

rces

/ N

WP)

0

10%

20%

30%

40%

50%

60%

70%

80%

90%

200320022001

44.9%

67.3%

82.8%

Source: Lloyd's


2001 year of account result (3-year accounted)The 2001 year of account has closed with a loss of£2,378 million representing 21.1 per cent of capacity. Theresult was heavily influenced by losses arising fromSeptember 11, but it also included a number of other majorcatastrophes witnessed in 2001 including:– the loss of the Petrobas oil rig off the coast of Brazil– the terrorist attacks on the Air Lanka fleet in Sri Lanka– the explosion at the AZF factory in Toulouse, France– tropical storm Allison that struck the Mid West and East

Coast of the US

(£m) 1993 1994 1995 1996 1997 1998 1999 2000 2001Total capacity 8,784 10,898 10,195 9,994 10,324 10,169 9,870 10,045 11,263Net premiums 5,892 5,690 5,893 4,810 4,709 4,869 5,785 6,203 6,930Underwriting result:Underwriting result:Underwriting result:Underwriting result:Underwriting result: - pure year 1,629 1,604 1,515 575 4 (904) (1,563) (1,794) (1,396) - prior years (959) 58 87 160 159 127 (166) (329) (580) - total 670 1,662 1,602 735 163 (777) (1,729) (2,123) (1,976)Gross investment return 958 509 609 591 398 520 596 608 540Result after personal expenses 225 1,095 1,149 606 (209) (1,065) (1,952) (2,397) (2,378)

Results after personal expenses

2002 and 2003 year of account forecasts(3-year accounted)Lloyd's forecasts - as at April 2004 - for the projectedresults for the 2002 and 2003 years of account are forprofits of £1,671 million and £1,780 million respectively.These forecast results are reflective of the favourableunderwriting conditions, as well as the low financial impactof catastrophe losses to date.

Lloyd’s results and forecast 1993-2003 (under 3-year accounted)

(£ m

illio

ns)

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2003f2002f200120001999199819971996199519941993

Source: Lloyd's


September 11, 2001The events of September 11, 2001 presented the globalinsurance industry with its greatest challenge. Lloyd's, facedwith its largest ever loss, acted swiftly to ensure claims wereeffectively managed.

Lloyd's loss projections for September 11, 2001 haveremained stable. As at December 31, 2003, the estimatedgross ultimate loss for the market, excluding inter-syndicatereinsurance, was USD8.89 billion. This compares toUSD8.75 billion estimated as at December 31, 2002. Lloyd'sultimate net loss estimate at December 31, 2003 wasUSD3.17 billion (December 31, 2002: USD3.26 billion). Thequality of Lloyd's reinsurance asset for September 11, 2001remains high with 89 per cent of recoverables due fromreinsurers rated "A-" or above.

Lloyd's notes that a substantial degree of uncertaintyremains over its ultimate gross and net liabilities arisingfrom the September 11, 2001 losses. This uncertainty is onlyto be expected since Lloyd's, together with the rest of theinsurance industry, is faced with uncertainties arising fromlegal disputes, reinsurance collectability issues and theemergence of further information. A number of syndicateauditors' opinions continue to reflect this uncertainty,although all of them were unqualified.

Lloyd’s September 11, 2001 loss estimates

0

1

2

3

4

5

6

7

8

9

10

Dec 2003Dec 2002Dec 2001

(US$

bill

ion)

Gross before reinsurance Net after reinsurance

Source: Lloyd's


Lloyd's business profileLloyd's remains a leading marketplace in today's globalinsurance industry. Its skilled and experienced underwritersprovide specialist insurance and reinsurance solutions tomany of the world's leading organizations, with over 90 percent of the FTSE 100 companies and 93 per cent of DowJones IA companies choosing to have policies at Lloyd's.More than half of the London market's gross premiums areplaced at Lloyd's, which underwrites 29 per cent of worldaviation and 12 per cent of world marine business. As aglobal reinsurer, Lloyd's was ranked 6th in terms of netpremium written in 2002.

The Lloyd's market conducts business in over 120 countriesand is authorised to trade in 72 territories worldwide,including all 25 EU countries. North America continues to beLloyd's leading market with an anticipated 45 per cent ofpremium income in 2004. Lloyd's is one of the leadingsurplus lines insurers in the United States, with a 21 percent market share in 2002. Other major marketplaces forLloyd's are the UK and Europe.

Lloyd's intends to further develop its position incontinental Europe and Asia. This was evidenced recently byLloyd's application to establish an onshore reinsurancebranch in China, and the creation of a new subsidiary inSpain, namely Lloyd's Espana.

Lloyd’s 2004 gross premium split by territory

North America

UK

Continental Europe

Asia Pacific

Latin America / Caribbean

Africa / Middle East

45%

27%

12%

8%

5%

3%

Source: Lloyd's


The casualty segment - covering professional indemnity,directors' and officers' liability, medical malpractice,employers' liability/workers' compensation, accident andhealth, and other general liability business - continues to beLloyd's single largest premium source. Property business isthe market's second largest component of overall premiumincome, closely followed by reinsurance business.

Lloyd's business is sourced via a global network ofindependent insurance brokers. The market remainssignificantly reliant on a small number of brokers with47 per cent of the market's premium income generatedby its top three brokers.

Lloyd’s gross premium by lines of business

Lloyd’s distributor concentration

2003 2002

(£ m

illio

n)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

ReinsuranceOtherThird party liabilityFire and other property damage

Marine, aviation and transport

Motor (including third party liability)

Accident and Health

Source: Lloyd's

Top 3 Brokers

Brokers 4-13

Others

47%

30%

23%


Capitalization

Lloyd's capital requirements are largely determined by itsrisk-based capital (RBC) system.

In its Special Report on Lloyd's of September 2003, A.M.Best considers the RBC system to be "at least comparableto other internal models used in the insurance industry",and notes how the system was tested by the World TradeCenter event, which occurred at a time when Lloyd's hadsuffered a succession of heavily loss-making years.

Lloyd's has conducted a Capital Project, the principalaim of which is to determine an appropriate capital andsolvency level for the market. It is expected that the resultsof this project will be announced during 2004.

Risk-Based Capital system (RBC)The RBC system is employed to determine the capitalrequirements of each member of Lloyd's, and is designed toequalize the expected loss per unit of net premium or netreserve to the Central Fund.

It is the Franchise Board's aim to bring the RBC systemto a level as close as possible to industry best practice, andcontinued development of the model is expected (forexample, to improve the way reinsurance risk is treated andits ability to distinguish on reserving strength betweensyndicates). Amendments were made to the RBCmethodology that increased the Funds at Lloyd'srequirements for members in 2003. The adjustments in theRBC methodology took into account, or improved theassessment of the underwriting cycle, operating risk,catastrophe risk, and portfolio diversification. No significantchange in the RBC system is envisaged in 2004, althoughnew realistic disaster scenarios will be included.

Regulatory activity in 2004/5 is expected to impact theRBC system. From 2005, the Financial Services Authority(FSA) will require managing agents to assess the capitalrequirements of each active syndicate under management.Future developments to the RBC system will be linked withthe implementation of the FSA's requirements. Ultimately, itis envisaged that managing agents will be responsible forcalculating their own RBC requirements, with Lloyd'splaying a facilitative and monitoring role to protect thecommercial franchise.

Realistic Disaster Scenarios (RDSs)Realistic disaster scenarios (RDSs) are used by Lloyd's as aninput to its RBC system to set capital requirements, as wellas to profile the market's prospective reinsurance asset.Introduced in 1995, RDSs require syndicates to carry outdisaster planning based on a range of hypotheticalscenarios, and report the results to the Franchise Board.Syndicates (including syndicates in run-off with liveexposures), are required to report on a minimum of nineRDSs, seven of which are mandatory scenarios, including anew terrorism scenario and a second event scenario.Syndicates are required to provide a breakdown, byreinsurer, of their anticipated reinsurance recoveries for eachevent.

It should be noted that a terrorist event such as theWorld Trade Center had not been considered as a RDS inLloyd's RBC system at the time of this loss.

Mandatory RDSs– Second event (i.e. an "Andrew" hurricane in the

immediate aftermath of a "Northridge" earthquake)– Florida Windstorm (comprising two separate events)– California Earthquake (comprising two separate events)– New Madrid Earthquake– European Windstorm– Japanese Earthquake– Terrorism

Lloyd's has commenced a two year RDS overhaul projectthat is due to complete in April 2005. This project isdesigned to improve consistency of risk assessment andraise loss modelling standards in the market. This projecthas been assisted by experts in the market, as well ascatastrophe modelling organisations AIR, EQECATand RMS.


The chain of securityLloyd's unique capital structure is based on a "chain ofsecurity" with four links represented diagrammaticallybelow. Please refer to appendix 7 for a more detaileddescription of Lloyd's capital structure.

It is important to recognise that members of Lloyd'sunderwrite severally and not jointly. It is the fourth and finallink in the chain of security that is only available to meet theliabilities of any member that fails. Lloyd's syndicates arecollections of one or more Lloyd's members that allowmembers to accept underwriting risks. Syndicates do nothave a legal identity.

The fourth and final link in the chain of securitycomprises Lloyd's central assets, and principally consists ofthe Central Fund and its insurance protection.

The Central FundThe Lloyd's Central Fund continues to be held andadministered by the Council of Lloyd's principally as a fundfor the protection of policyholders.

The Central Fund is financed by levies on members. For2004, Central Fund contributions are to increase to 1.25 percent of members overall allocated premium limits, up from1 per cent in 2003. New corporate members underwritingon new syndicates are required to make contributions atdouble the annual rate for the first three years of operationsat Lloyd's. The premium levy that was charged at 2 per centof gross written premium for most classes of businessceased at the end of 2003.

Immediately after September 11, Lloyd's stated that itwould aim to increase its central net assets to in excess of£700 million by December 31, 2003. This target wasachieved as central net assets increased by 39 per cent to£781 million as at the 2003 year-end. The Central Fundaccounted for £711 million of this total. However, it shouldbe recognised that in April 2003 Lloyd's commencedarbitration proceedings in respect of the insurance policythat provides protection to the Central Fund.

A significant threat to the Central Fund comes fromsyndicates in run-off. Costs to the Central Fund from run-offyears have escalated in recent years, compounded by thelack of reinsurance to close capacity in the market. Lloyd'swill actively manage this issue over the near-term, seekingalternative solutions and improving the monitoring andreporting of run-off performance. The appointment ofLloyd's first Head of Claims and Reinsurance in 2003 tooversee Lloyd's run-off project, is seen as evidence ofLloyd's commitment to resolve this important issue.

Traditionalmembers

Corporatemembers

£ millionend 2003

Premiums trustfunds

Premiums trustfunds

18,995

Funds at Lloyd's Funds at Lloyd's 9,659

Other declaredassets

278

Lloyd's central net assets(includes Central Fund of £711 million)

781


The Central Fund insurance policyLloyd's Central Fund has been supported by a five yearinsurance cover that ceased at the end of 2003. Theinsurance cover is designed to meet unrecovered losses tothe Central Fund where it has been applied to meetmembers' cash calls. For a brief overview of the CentralFund insurance policy, please refer to appendix 7.

Claims made by Lloyd's under the policy are expected toincrease during 2004 to reach the overall aggregate limit of£500 million. However, insurers have disputed their liabilityto meet claims made under the policy, and in April 2003,Lloyd's commenced arbitration proceedings for recovery ofthe sums claimed from the insurers.

Lloyd's remains confident that the arbitration, which isdue to present its ruling towards the end of 2004, will bedetermined in its favour. If the arbitration is not determinedentirely in favour of Lloyd's, then Lloyd's estimates that thenet assets of the Central Fund will be reduced by£290 million as a worst case scenario. This is Lloyd'sstated worst case scenario of the insurance policy beingdeclared void and all premium and claim payments beingreturned to the respective parties.

In April 2003, both A.M. Best and Standard & Poor'saffirmed their ratings of Lloyd's, stating that the ratingswere not affected by the commencement of the arbitrationproceedings in respect of the Central Fund insurance policy.

Lloyd's is understood to be reviewing the appropriatelevel for its Central Fund as part of its Capital Project.Lloyd's has stated that it continues to explore options forsome form of protection for the Central Fund, butindicates that another insurance policy is unlikely atpresent. Market commentators suggest that Lloyd's mayborrow money, perhaps from its members, to furtherstrengthen the Central Fund.

Exposure to Central Fund insurance

0

100

200

300

400

500

600

700

800

900

200320022001200019991998

(£ m

illio

n)

36154

341 363

563

491

290Maximum exposure to Central Fund insurance

Source: Lloyd's


Trends in capacity

OverviewFollowing the significant increases in capacity in 2002 and2003, Lloyd's announced an opening capacity figure for the2004 year of £14.96 billion, marginally up on the 2003opening capacity of £14.39 billion, but little changed fromthe 2003 year-end capacity figure. Described by Lloyd's asunderlining the continued strength and underwritingdiscipline within the market, the 2004 capacity figurefollows the first business plan approval process underLloyd's new Franchise arrangements.

Lloyd’s capacity 1993-2004

0

2

4

6

8

10

12

14

16

200420032002200120001999199819971996199519941993

Source: Lloyd's

Capacity

(£ b

illio

n)


The opening capacity figure for 2004 excludes QualifyingQuota Share (QQS) capacity, which is expected to contractmaterially. Reflecting Lloyd's desire to reduce the market'sreliance on this transient source of capital, Lloyd'srestricted the maximum permitted level for a QQS contractto 10 per cent of a syndicate's capacity for 2004, downfrom 30 per cent in the previous year. All QQSarrangements require Lloyd's approval, and as atFebruary 2004, £200 million of QQS capacity had beenapproved for 2004, compared with £1,100 million for2003 as a whole.

The number of businesses in the Lloyd's marketrecorded a further reduction in 2004, being:– 66 syndicates commenced trading for 2004 as compared

to 71 for 2003.– 45 managing agents are active in the market,

unchanged from 45 in 2003.– Three new syndicates commenced trading for 2004

(includingTrenwick syndicate 839 that was renumberedto create Canopius syndicate 4444), with a combinedopening capacity of £356.8 million.

– Excluding mergers and including Trenwick syndicate839, six syndicates, with a combined capacity of£575.6 million, ceased trading during 2003.

– Five syndicates were involved in mergers during 2003,of which two traded forward into 2004.

Average TotalManaging Syndicate Individual Corporate Capacity

Agents Syndicates Capacity (£m) Members Members (£m)2001 56 109 101.6 2,850 896 11,0722002 50 86 141.8 2,466 837 12,1962003 45 71 202.8 2,198 762 14,3962004 45 66 226.7 2,048 752 14,961


2004 Capacity profile

Capacity Provision2004 2003

(£m) (£m) 2004 vs 2003Source of capacity Capacity Market Share Capacity Market share % changeTrade Investors 5,926 40% 6,292 44% -6%UK Listed 4,444 30% 4,227 29% +5%UK Non-Listed 1,090 7% 991 7% +10%Other Corporate 687 5% 163 1% +321%Conversion Capital 945 6% 878 6% +8%Names (Unlimited) 1,869 12% 1,844 13% +1%TotalTotalTotalTotalTotal 1 4 . 9 6 01 4 . 9 6 01 4 . 9 6 01 4 . 9 6 01 4 . 9 6 0 1 0 0 %1 0 0 %1 0 0 %1 0 0 %1 0 0 % 1 4 . 3 9 01 4 . 3 9 01 4 . 3 9 01 4 . 3 9 01 4 . 3 9 0 1 0 0 %1 0 0 %1 0 0 %1 0 0 %1 0 0 % + 4 %+ 4 %+ 4 %+ 4 %+ 4 %

Source: Lloyd’s

Providers of Lloyd’s capacity 2002 - 2004

Names limited liability UK listed and other corporate Other insurance industry Bermudian insurance industry US insurance industryNames unlimited

Capa

city

(£ b

illio

n)

0

2

4

6

8

10

12

14

16

200420032002

Source: Lloyd's


The 2004 capacity profile remains diverse both in terms ofsource of the investor and from a geographical perspective.

This diversity of investor - including major internationalinsurance companies, investment institutions and individuals- is considered by some as a strength to Lloyd's capitalstructure, as demonstrated by the market's ability to retainand attract capital to support continued trading followingthe Word Trade Center event.

The insurance industry remains the largest provider ofcapital support with 43 per cent (2003: 44 per cent) oftotal market capacity. UK listed vehicles are the nextlargest source of capacity at 30 per cent (29 per cent)of total capacity.

Lloyd’s capacity profile

UK Listed UK Non-Listed Other corporate Conversion capital Names (unlimited)Trade investors

Capa

city

(£ b

illio

n)

0

2

4

6

8

10

12

14

16

200420032002

Source: Lloyd's


The 20 largest capacity providers in 2004 provide 62 percent (2003: 62 per cent) of the market's capacity, with noone capital provider supplying greater than seven per centof the market's total capacity. Amlin remains the largestsingle capital provider with capacity of £1,000 million for2004, and Limit (QBE) closely behind with capacity of £918million. Capacity provided by Liberty Mutual witnessed an85 per cent increase over the 2003 figure, lifting LibertyMutual from the market's 10th largest provider in 2003, tothird place for 2004. The ACE Group's capacity contractedby 24 per cent to £550 million as ACE continued to focusgrowth of London market business on ACE INA UK. Capacityprovided by St Paul reduced by 25 per cent to £329 million.

In terms of managed capacity, Limit (QBE) is Lloyd's largestmanaging agent in 2004, with capacity of £1,130 million,or a 7.6 per cent share of the total market. The leading 20managing agents by capacity under management controlled77 per cent of the total market.

Capacity provided by corporate members of Lloyd's(including NameCos, Scottish Limited Partnerships, andGroup Conversion Vehicles), accounts for 87 per cent oftotal market capacity for 2004. Individual unlimited liabilitymembers account for the balance of Lloyd's capacity.

Lloyd’s capacity 1979 - 2004

ILV Individual - limited Spread corporates Dedicated corporatesIndividual - unlimited

Capa

city

(£ m

illio

n)

0

Source: Lloyd's

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

20042003200220012000199919981997199619951994199319921991199019891988198719861985198419831982198119801979


TrendsOpening market capacity for 2004 is a record high at£14.96 billion, albeit only marginally larger than theopening figure in 2003. Lloyd's has stated that it expectscapacity to contract in the next down-cycle, and believesunderwriters will focus on profit rather than market share.High capacity utilisation, a trend that commenced in thelate 1990s, is expected to continue as fully alignedcorporate vehicles will closely match premium incometo capacity.

From a market in 1993 where all capital was provided byindividual private investors, sources of Lloyd's capacityproviders have diversified to the current position in 2004,where 87 per cent of capacity is supplied by limited liabilitycorporate members. Lloyd's has ceased to admit newunlimited liability members, and recent changes to UK taxlegislation has removed one of the last barriers to unlimitedliability members converting to limited liability membership.Whilst prospects for profitable underwriting remain good, itis expected that individual members will remain a feature ofthe market. In recent years, individual investors have beenan important source of capital for start-up syndicates.

Concentration of Lloyd's capital increased with alignedcapacity rising by eight per cent to £11,066 million in2004 to represent 74 per cent (2003: 71 per cent) ofthe total market.

Lloyd’s capacity utilisation

0

2

4

6

8

10

12

14

16

20032002200120001999199819971996199519941993Capacity

(£ b

illio

n)

Gross Utilisation incl. QQS

Source: Lloyd's


The trend to fully integrated status - Integrated Lloyd'sVehicles (ILVs) - continued. 27 syndicates, with a combinedcapacity of £7,808 million, or 52 per cent of the market,commenced trading in 2004, with 100 per cent of theircapacity aligned with managing agent control. Thiscompares to £6,947 million, or 48 per cent, in 2003.

The number of active members of Lloyd's declined againin 2004:– Individual members decreased from 2,198 in 2003 to

2,048 in 2004.– Corporate members (including Namecos, SLPs and other

conversion vehicles) were down from 762 in 2003 to752 in 2004.

The trend for a smaller number, but larger in capacity terms,of syndicates continues. There were 66 syndicates (2003: 71syndicates) that commenced trading in 2004, with anaverage capacity size of £227 million, up from an averagesize of £203 million in 2003. The increase in the averagesize of each syndicate and of each member has raisedconcerns with analysts regarding the increased risk toLloyd's Central Fund from the risk posed from largemembers. Lloyd's review of its capitalization structure isexpected to address this issue.

Corporate capacity - aligned / spread

Active members of Lloyd’s 1995 - 2004

0

2

4

6

8

10

12

20042003200220012000199919981997199619951994

SpreadAligned

(£ b

illio

n)

Source: Lloyd's

Individual membersCorporate members

Num

ber

of a

ctiv

e m

embe

rs

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2004200320022001200019991998199719961995

Source: Lloyd's


Providers of Lloyd’s capacity 1993 - 2004

Market capacity and syndicate numbers

Names limited liability UK listed and other corporate Other insurance industry Bermudian insurance industry US insurance industryNames unlimited

Capa

city

(£ b

illio

n)

0

2

4

6

8

10

12

14

16

200420032002200120001999199819971996199519941993

Source: Lloyd's

0

2

4

6

8

10

12

14

16

200420032002200120001999199819971996199519941993

0

50

100

150

200

250

Capacity

Capa

city

(£ b

illio

n)

Number of syndicates

Num

ber

of a

ctiv

e sy

ndic

ates

Source: Lloyd's


Lloyd's Franchise implementation

Evolution of the franchiseOver the past year, Lloyd's has continued to evolve from atraditional statutory regulator to a much wider role ofmanaging and developing the Lloyd's franchise. Lloyd'scontinued to drive forward with the implementation of itsfranchise system, and achieved a number of key initiatives in2003, most notably:– the creation of the Franchise Board and committees.– the establishment of the Franchise Performance

Directorate to improve the commercial performance ofthe market.

– the development of the Risk Management Division toidentify, prioritise and address those risks that couldthreaten the franchise.

– the continued development of Lloyd's licences, servicesand brand.

– amendments to relevant European Union directives tofacilitate the move to annual accounting.

Lloyd's describes the franchise as encompassing theLloyd's brand, reputation, security ratings and world-widetrading rights that are conferred on all members of Lloyd's.With the franchise structure designed to redefine therelationship between Lloyd's, as franchisor, and managingagents, as franchisees.

BackgroundLloyd's recognised that the market needed to modernise itscomplicated and opaque structure if it was to competeeffectively in the future and become the trading platform ofchoice for specialist insurance and reinsurance business. Inearly 2001, the Chairman's Strategy Group (CSG) wascreated to look at Lloyd's future strategy. July 2002 saw thepublication of a 56-page consultation document,described by the then current chairman of Lloyd's as, "theroute map to a new Lloyd's". Members voted in favour ofthe CSG proposals in September 2002, thereby givingLloyd's its mandate to create a modern, transparent andprofitable marketplace.

The CSG proposals broadly centred on two aims:– to improve profitability and performance by moving to a

franchise structure for Lloyd's.– to provide a more financially intelligible and transparent

market by implementing a range of capital and reportingreforms.


Franchise vision and objectivesThe franchise vision for Lloyd's developed through the CSGprocess is:

"We will be the leading specialist insurancemarketplace. Our businesses are independent and operatewithin a franchise: committed to delivering consistentunderwriting profit, benefiting from a common rating andmutual security, and attracting the highest qualitymanagement and underwriting talent."

The main objective of the franchise is "to create andmaintain a commercial environment in which the long-termreturn to all capital providers is maximised".

Franchise BoardOne of the first steps taken by Lloyd's was to create theFranchise Board at the end of 2002 to replace the Lloyd'sMarket Board and the Lloyd's Regulatory Board. TheFranchise Board sets the franchise strategy and isresponsible for risk management and performance targetsacross the market.

The Franchise Board - under the leadership of thechairman of the Council of Lloyd's, Lord Levene - has 11members, including four independent non-executivemembers. The chairman, together with the Lloyd's ChiefExecutive Officer, the Director of Finance and RiskManagement Operations, and the Franchise PerformanceDirector, constitute the Board's executive members.

The Council has set the Franchise Principles within whichthe Franchise Board will operate to achieve its mainobjective. The Principles cover three main areas:– overriding principles relating to legal, regulatory and

corporate governance.– capital principles that emphasise equity between capital

providers and prudence in capital setting.– operating principles that include creating the market

supervision framework in accordance with the FinancialServices Authority (FSA) requirements.

The Council will monitor the Franchise Board's performanceversus those Principles through the mechanism of theCompliance Committee. In turn, the Franchise Board willhold the Executive accountable for carrying out the policy ofthe Board.

Franchise strategyThe overriding objective for the franchise in the near-term ismanaging the performance of the market in order tomaintain underwriting discipline as the insurance cycleweakens. To support its principal objective to create andmaintain a commercial environment at Lloyd's in which thelong-term return to all capital providers is maximised, it isunderstood that a franchise business plan will focus on fourthemes over the next two years, namely:1. Manage the performance of the market to support the

achievement of a set long-term profit target.2. Maintain Lloyd's security by ensuring capital

requirements strikes a balance between the need forprudence and allowing capital providers to achievecompetitive returns. In the short-term, the FranchiseBoard aims to achieve a one notch upgrade in Lloyd'smarket rating from both Standard & Poor's andA.M. Best.

3. Drive forward with business process reforms.4. Improve services and benefits available to franchisees,

to include:– a project aimed at defining the current Lloyd's

brand.– the application of an onshore reinsurance licence

in China.– the completion of the transition to UK GAAP

annual accounting.


Franchise Performance DirectorateThe Franchise Performance Directorate has been established,with Rolf Tolle appointed as its director. The role of theDirectorate will be to implement the performance-relatedaspects of the franchise. The Franchise Board has set across-cycle profit target for Lloyd’s of a seven per centpre-tax underwriting return, in excess of a circa three to3.5 per cent risk free return on Funds at Lloyd’s. TheFranchise Performance Directorate will play a centralrole in the achievement of this target. In the short-termthe Directorate will aim to improve the franchisee businessplanning process, develop a performance managementsystem, and undertake a series of themed reviews basedon its findings of the 2004 syndicate business plans andrisk management review.

The Franchise Board has a number of key projects inplace to drive forward the performance of the market.These include:– a review of Lloyd's inwards claims processes with the

aim to improve the market's claims management andreduce costs.

– a project to proactively manage Lloyd's outwardreinsurance asset.

– Lloyd's run-off project looking at the solutions forclosing open years of account, and improving themonitoring and reporting of run-off syndicates'performance.

In June 2003, Lloyd's franchise performance director,Rolf Tolle, announced the appointment of Jeremy Pinchin(previously Special Council for September 11), in thenew role of Head of Claims and Reinsurance. His rolewill include responsibility for Lloyd's oversight of themarket's inwards claims and outwards reinsuranceand run-off project.

Business process reformLloyd's is determined to modernise business processes toimprove customer service standards and reduce operatingcosts, and thereby remain a marketplace of choice forpolicyholders and brokers. Initiatives underway includeLondon Market Principles (LMP) and Kinnect.

LMP is a market-wide initiative supported by theunderwriting and broking communities at Lloyd's and in theLondon company market. Sponsored by Lloyd's MarketAssociation (LMA), the London Market Insurance Brokers'Committee (LMBC), the International UnderwritingAssociation (IUA) and Lloyd's, LMP aims, through a processof reform, on improving services standards in the placingof business, the payment of premiums, the production ofpolicy documentation and the settlement of claims.

Kinnect (formerly project Blue Mountain) is aninternational venture, sponsored by Lloyd's, designed toremove paper from the placement of risk in the Lloyd'smarket. It enables commercial lines trading partners to sendand receive risk data electronically via the Kinnect Platform.In December 2003, Willis passed the first risk through theKinnect Platform.

In October 2003, Lloyd's appointed as Chairman ofKinnect, Iain Saville, who became at the same time its firsthead of business process reform to co-ordinate Lloyd'sreform initiatives at the highest level.

Governance of Lloyd'sUnder the Lloyd's Act 1982, the Council of Lloyd's remainsthe governing body of the market and has supervisoryresponsibilities that it cannot shed. Ultimate regulatoryresponsibility for Lloyd's rests with the Financial ServicesAuthority (FSA) under the Financial Services and MarketsAct 2000.

The Council of Lloyd's can discharge some of itsfunctions directly, but has delegated substantial powers tothe Franchise Board to manage both the supervisory andcommercial affairs of the Lloyd's franchise.


Regulatory and accounting environment

Lloyd's and the Financial Services Authority (FSA)The Financial Services Authority (FSA) assumed fullregulatory responsibility for the supervision of Lloyd's onDecember 1, 2001. Under the Lloyd's Act 1982, the Councilof Lloyd's remains the governing body of the market withthe power to regulate and direct the business of Lloyd's.Whilst the Council discharges some of its function directly,for the majority of its functions, the Council acts through theFranchise Board. In the past, the FSA delegated the majorityof its regulatory functions to Lloyd's to avoid a duplicationof effort. In 2003 the FSA began the process to take a moredirect approach.

The FSA's risk and capital requirements for theLloyd's marketIn April 2003, the FSA published a consultation paper(CP178 - Review of prudential regulation of the Lloyd'smarket), that proposed the FSA should change its rules tobring Lloyd's insurance business within the scope of theFSA's Integrated Prudential Sourcebook. The FSA reportsthat feedback to the consultation paper supports itsproposals for Lloyd's, and in particular that the FSA should:– regulate the market more directly by applying rules not

just to the Society of Lloyd's, but also to managingagents, on the basis of the responsibility in practice formanaging the underlying risks; and

– follow the same policy for Lloyd's the FSA proposes forother general insurers.

A further consultation paper was released in April 2004,outlining the proposed rule changes for the FSA's risk andcapital requirements for the Lloyd's market. In publishingthis paper, the FSA stated:

"The proposals we are setting out today will help toensure that senior management at both the Society ofLloyd's and at managing agents focus on theirresponsibilities for managing risk effectively and on the levelof capital needed to support the risks of the insurancebusinesses. This will, in turn, enhance confidence in theLloyd's market and improve protection for policyholders".(David Strachan, FSA Insurance Sector Leader,April 30, 2004).

The proposed new requirements apply mostly tomanaging agents and to the Society. There are, however,significant implications for Lloyd's members, as the FSAexpects that capital requirements for some will increase,although members as well as policyholders should benefitfrom better risk management as a result of the proposals.The FSA states that the proposals are not designed toundermine the Society's ability to set capital levels, or tomake other internal rules for the market, so long as thoserules are consistent with the FSA's own regime.


The FSA policy proposals: dividing responsibilitiesbetween the Society and managing agentsThe April 2004 consultation paper outlines the proposedrules and guidance which are required by managing agents:– establish and maintain appropriate controls over risks

affecting insurance business carried on throughsyndicates, including credit risk and market risk, withinlimits that are substantially the same as those forinsurance companies; and

– assess the capital needed to support the insurancebusiness carried on through each syndicate that theymanage. The FSA believes this "will help engenderbetter understanding and management of the risksinvolved in the conduct of that business, and helpto ensure that financial resources are adequate atall times."

With regards to the Society, the proposed rules andguidance require Lloyd's to:– establish and maintain appropriate controls over the

risks affecting funds that it holds and manages centrally,including managing risk within appropriate limits; and

– assess the capital needs for each member, taking intoaccount the capital needed to support the insurancebusiness carried on through each syndicate, as assessedby managing agents. This reflects the fact that theSociety has an aggregate view across the market, butmanaging agents do not. In particular, the Society cantake account of members' participation on more thanone syndicate, assets held outside syndicates, and theobligations that its own central assets need to support.

Consistency with other insurersTo achieve a demonstrable level playing field, the FSAproposals for Lloyd's are largely consistent with those forother insurers, with the vast majority of the prudentialregulation rules applying to both.

With this aim in mind, the FSA proposes:– to in future allow audited interim profits to qualify as

capital resources for insurance businesses at Lloyd's; and– to extend to Lloyd’s the use of a new Enhanced

Capital Requirement (ECR), which is a higher andmore risk-sensitive measure than the current solvencyrequirements under the EU Insurance Directives,developed for other insurers. The FSA proposes that theECR should be met for the business of all activemembers, as well as members that go into run-off afterJanuary 1, 2005.

The FSA recognizes that there are areas where the proposedchanges do not address fully some inconsistencies betweenits rules for Lloyd's and other insurers. Perhaps, of mostimportance, the FSA proposes to continue to allow theadmissibility of some assets, such as letters of credit, thatare exceptionally permitted for Lloyd's.

TimingThe FSA is seeking responses to its proposals byJuly 30, 2004. It is intended that the new requirementswill then become effective from January 1, 2005,coinciding with Lloyd's move to annual accounting.


Implementation of annual accountingA business objective of the Franchise Board is the move toannual accounting as the main statutory reporting regimefor the market to achieve greater transparency betweenLloyd's performance and its global peers.

Under the current statutory three year accounting basis,all premiums and claims and associated expenses arerelated to the underwriting year in which the policy inceptsand the determination of the underwriting result is deferreduntil the year of account is closed at the end of three years.

Lloyd's announced in November 2003, that the marketwill adopt UK Generally Accepted Accounting Principles (UKGAAP) from January 1, 2005. Lloyd's plans to adoptInternational Accounting Standards (IAS) when there ismore clarity on the proposed standard on accounting forinsurance contracts. The necessary amendments to theEuropean Commission's Insurance Accounts Directive weremade and this now provides the framework to enableLloyd's to adopt annual accounting for statutory reportingpurposes. Lloyd's reports that much of the work remains tobe done during 2004 to ensure a "smooth transition toUK GAAP".

Lloyd's has published pro-forma unaudited annuallyaccounted results since 2002.


Ratings

Market ratingsStrong and stable financial strength ratings are widelyregarded as increasingly necessary to operate effectively intoday's global (re)insurance markets, and Lloyd's recognisesthat it is no exception to this requirement. After consultingwidely, the Franchise Board has determined that the targetsecurity ratings for Lloyd's should be a minimum of "A+"from Standard & Poor's (S&P), and "A" from A.M. Best(Best's). This will represent a one notch upgrade by bothrating agencies and will restore Lloyd's market ratings totheir pre September 11 position. The Franchise Board aimsto achieve this upgrade in its ratings by the end of 2005.

There has been some market comment following theannouncement of its 2003 results that an upgrade in Lloyd'smarket ratings is imminent given the market's profitability,prospects for future profits, and the improvement in themarkets capital resources. However, Lloyd's managementteam acknowledges that an upgrade in its rating in 2004may still be premature, but believes this will be a realisticexpectation once the market has reported its results in2005.

Traditionally, both S&P and Best's complete their annualreview of Lloyd's market rating once Equitas has publishedits annual results for the year ending March 31. Uncertaintyover the ultimate outcome of the run-off of Equitas'liabilities and the contingent liability this could create forLloyd's has in the past been cited as a negative factor inthe Lloyd's rating, and has probably represented a onenotch drag on the current rating in recent years.

AM BestIn July 2003, A.M. Best affirmed it's "A-" (excellent)financial strength rating of the Lloyd's market with astable outlook.

AM Best stated that the affirmation of the ratingreflected:– Lloyd's maintenance of an excellent business profile

and capitalization.– its improving performance.– stable investment returns.– enhanced standards of risk management.

Offsetting factors included:– uncertainty as to the ultimate adequacy of

Equitas' reserves.– increasing risk to the Central Fund from large members.

Standard & Poor'sIn its rating of the Lloyd's market published in September2003, Standard & Poor's stated that its "A" (strong)financial strength rating of Lloyd's reflected:– the continuing commitment of capital providers to the

market and the consequent increase in capacity andfunds at Lloyd's in 2003.

– the likelihood of very strong operating performance forthe 2002 and 2003 years of account.

– the benefit of some further premium rate increases forthe lines of business that Lloyd's writes in 2003.

These positive factors were said to be partly offset by:– Lloyd's reduced financial flexibility as a result of

open-year losses.– the significant structural reforms still required to

maintain the market's competitive position.– the poor historic returns experienced by many capital

providers prior to 2002.– the vulnerability of the market to reinsurance failure– the projected utilisation of (and uncertainty around)

the Central Fund insurance.– contingent exposure to Equitas.


FitchIn addition to the interactive market rating issued by AMBest and Standard & Poor's, Fitch maintains a publicinformation rating in respect of the Lloyd's market. In July2003, Fitch affirmed its "A-" (strong) insurer financialstrength rating of Lloyd's and at the same time revised therating outlook to stable from negative.

Syndicate ratingsAs distinct from the security of the market as a whole, it hasbeen recognised that the performance of individualsyndicates is important to policyholders. Successfulsyndicates are better able to attract and maintain supportfrom capital providers and, hence, are more likely to be ableto offer continuity of relationship and increased capacityover time.

For several years, both Moody's and Standard and Poor's(S&P) have issued ratings which, rather than financialsecurity, reflect the relative performance and volatility ofsyndicates operating in the market.

In September 2002, S&P launched its Lloyd's SyndicateAssessments (LSAs), replacing its current syndicate ratingproduct, and described by S&P as a "new tool for analysingLloyd's syndicates". LSAs are S&P's view of the dependencyof individual syndicates on Lloyd's Central Fund, brand,international licensing agreements and infrastructure. Theassessments use both qualitative and quantitative analysisdrawn from publicly available information. In S&P's 2003review of its LSAs, the profile of 48 syndicates wereassessed, representing 80 per cent of Lloyd's total marketcapacity for 2003. The syndicate assessments can besummarised as:

"5pi" (very low dependency): 0 syndicates"4pi" (low dependency): 4 syndicates"3pi" (dependent): 19 syndicates"2pi" (high dependency): 15 syndicates"1pi" (very high dependency): 10 syndicates

Both Moody's, since May 2000, and AM Best, since April2001, have assigned financial strength ratings to individualLloyd's syndicates that allow direct comparison with peersin the company market. To date, there has been limitedtake-up by managing agents of these interactive syndicatefinancial strength ratings, with Moody's rating fivesyndicates and AM Best rating 13 syndicates.


At the time of publication of this report, individual financialstrength ratings assigned to syndicates were:

Syndicate Managing agent Moody's rating Date Comment1007 SVB Syndicates Ltd A2 (Good) March 12, 2004 Downgraded from A12001 Amlin Underwriting Ltd A1 (Good) May 27, 2004 Upgraded from A22020 Wellington Underwriting Agencies Ltd A1 (Good) June 1, 2004 Rating affirmed2147 SVB Syndicates Ltd A3 (Good) March 12, 2004 Outlook changed from negative to stable2488 ACE Underwriting Agencies Ltd Aa3 (Excellent) January 14, 2004 Rating affirmed

Syndicate Managing agent Best's rating Date Comment0510 R J Kiln & Co Ltd A s (Excellent) November 5, 2003 Rating affirmed0570 Atrium Underwriters Ltd A– s (Excellent) December 17, 2003 Rating affirmed0609 Atrium Underwriters Ltd A s (Excellent) December 17, 2003 Rating affirmed0623 Beazley Furlonge Ltd A s (Excellent) October 14, 2003 Rating affirmed0958 Omega Underwriting Agents Ltd A s (Excellent) December 9, 2003 Rating affirmed1243 Euclidian Underwriting Ltd A– s (Excellent) August 5, 2003 Rating affirmed1414 Ascot Underwriting Ltd A+ s (Superior) March 17, 2004 Rating affirmed2001 Amlin Underwriting Ltd A s (Excellent) December 10, 2003 Rating assigned2003 Catlin Underwriting Agencies Ltd A s (Excellent) April 7, 2004 Rating affirmed2010 Cathedral Underwriting Ltd A– s (Excellent) April 7, 2004 Rating affirmed2623 Beazley Furlonge Ltd A s (Excellent) October 14, 2003 Rating affirmed3000 Markel Syndicate Management Ltd A– s (Excellent) June 30, 2003 Rating assigned


Equitas

Lloyd's retains a contingent exposure to the potential failureof Equitas via the application of overseas regulatorydeposits and the funds of current members who alsounderwrote prior to 1993, as well as its contingent liabilityto Lioncover and Centrewrite. However, Lloyd's is under nolegal obligation to fund Equitas should Equitas fail todischarge its liabilities. (For a background to the EquitasGroup please refer to appendix 8 of this report).

Given the long-tail nature of its liabilities, it will be anumber of years before it can be reasonably determinedwhether Equitas will have the funds to run-off thoseliabilities. Consequently, the uncertainty surroundingEquitas' loss reserves is considered a long-term negativefactor in the Lloyd's market financial strength ratings.

Asbestos liabilitiesAsbestos reserves form the largest element of Equitas' lossreserves. As at March 31, 2004, gross undiscounted reserveswere £7.3 billion (2003: £9.6 billion), of which grossundiscounted asbestos reserves amounted to £4.0 billion(2003: £5.3 billion). On a discounted basis, to take intoaccount the time value of money, asbestos reserves were£2.8 billion (2003: £3.7 billion).

Each year Equitas conducts a comprehensive review ofits asbestos liabilities. For the year ended March 31, 2004,Equitas increased its gross discounted asbestos loss reservesby £296 million, primarily due to a general trend of higherpayouts to mesothelioma victims, and a worsening of claimsfor some key assureds. Equitas sees no epidemiologicalevidence to lead it to change it views on the number offuture mesothelioma victims. Equitas has also continued toattempt to identify unknown policyholders who may presentclaims in the future, and during the year has increasedreserves based on its findings.

Equitas continued with its strategy of seeking policybuyouts, and during the year agreed deals with sevenpolicyholders, including three of Equitas' five largestasbestos exposures. Equitas has now completed over 180buyout agreements, bringing certainty, reduced transactioncosts and eliminating credit risk to both parties. This buyoutpolicy will remain central to Equitas' strategy going forward.

Equitas also noted that it concluded a number ofcommutation agreements with its reinsured policyholdersseeking recovery for asbestos claims, including resolving thegroup's largest reinsurance exposure.

Equitas believes that, in the short-term, the prospects forFederal asbestos reform legislation in the United States areremote. Equitas could not support legislation that wasdrafted in the past year, because it felt that being the onlycompany in the world not protected from the risk of beingrendered insolvent by the operation of the bill was "neitherfair nor reasonable".


Equitas financial results for year endedMarch 31, 2004In June 2004, Equitas released its financial results for theyear ended March 31, 2004. Highlights reported byEquitas were:– accumulated surplus after tax decreased by £67 million

to £460 million primarily driven by the need to increaseasbestos claims reserves.

– Equitas' solvency margin (accumulated surplus stated asa percentage of net claims outstanding) increased to 9.8per cent from 8.7 per cent. This compares to a solvencymargin of 5.6 per cent when Equitas commencedoperations in 1996.

– gross discounted reserves for asbestos claims werestrengthened by £296 million.

– investment return exceeded the unwinding of thediscount by £123 million, compared to the deficit of£72 million in the previous year. Because Equitasdiscounts its loss reserves, a key measure for investmentperformance is a comparison of investment return withthe unwinding of the discount. Equitas has nowgenerated investment returns in excess of theunwinding of the discount of £732 million since itcommenced business.

– the group completed a number of agreements duringthe year to crystallize asbestos claims for three of its fivelargest direct asbestos exposures, as well as its largestreinsurance exposure.

– gross claims paid amounted to £1.4 billion, up from£1.1 billion in the previous year. The increase inpayments was due to the large asbestos buyouts andcommutations concluded in the year. Equitas has paidclaims of over £15 billion since its inception.

– during the past year, Equitas completed the negotiationof 83 commutation agreements continuing with itsstrategy to realize the group's outwards reinsuranceasset. When Equitas began, it inherited over £7 billion ofreinsurance assets. Over the past seven and a half years,the group has realized over £6 billion of its reinsuranceassets, reducing the outstanding debt to just over£1 billion at March 31, 2004.

– operating expenses, which are included within claimspayments, decreased by 10 per cent to £91 million. Theannual cost of running Equitas has now decreased fromover £240 million.

March 31, 2004 March 31, 2003Assets £m £mFinancial investments 4,717 5,780Financial reinsurances 381 587

5,098 6,367Debtors - reinsurance operations 419 705Other debtors 23 41Other assets, prepayments and accrued income 78 74

5,618 7,187

Liabilities £m £mShareholders funds:Retained surplusRetained surplusRetained surplusRetained surplusRetained surplus 460460460460460 527527527527527

After discount After discountGross outstanding claims 5,353 7,039Reinsurance recoverable 685 949Net 4,668 6,090Other liabilities 490 570

5,618 7187

Equitas consolidated balance sheet at March 31, 2004

Source: Equitas


Appendix 1Syndicates active for 2004 year of account

Capacity Split of 2004 allocated capacity2004 2003 % Corporate “Unlimited”

Underwriter Syndicate £m £m Inc/Dec Aligned Unaligned MAPA Bespoke Agent OwnerR S Childs 0033 HIS 847.44 842.36 +0.6% 64.9% 10.4% 8.5% 16.2% Hiscox Syndicates Ltd Hiscox

C Ray 0044 JDB 3.00 4.50 -33.3% 78.9% 4.1% 0.0% 17.0% Canopius Managing Agents Ltd Talisman

T R C Corfield 0190 FRW 541.00 267.00 +102.6% 100.0% 0.0% 0.0% 0.0% Liberty Syndicate Management Ltd Liberty

R White 0218 EMP 433.23 433.23 58.1% 13.2% 10.3% 18.5% Cox Syndicate Management Ltd Cox

C Hart 0260 KGM 34.16 34.16 48.0% 17.3% 6.1% 28.6% KGM Underwriting Agencies Ltd Perserverance Ltd

A D Elliott 0282 LSM 253.00 163.00 +55.2% 100.0% 0.0% 0.0% 0.0% Liberty Syndicate Management Ltd Liberty

C Toomey 0308 KLS 5.00 4.00 +25.0% 86.2% 3.6% 0.0% 10.2% R J Kiln & Company Ltd Kiln

M S F Pritchard 0318 MSP 158.93 158.93 34.6% 39.3% 11.1% 15.0% Ensign Managing Agency Ltd Ensign

A J Walker 0382 PWH 115.00 100.00 +15.0% 87.8% 3.8% 0.8% 7.6% Hardy (Underwriting Agencies) Ltd Hardy

D A Constable 0386 DAC 500.00 449.97 +11.1% 54.6% 12.0% 12.0% 21.5% Limit Underwriting Ltd QBE

P Ceurvorst / 0435 FDY 400.00 400.00 100.0% 0.0% 0.0% 0.0% Faraday Underwriting Ltd Berkshire Hathaway

M Rayner

D Hoare / 0457 WTK 230.00 225.00 +2.2% 100.0% 0.0% 0.0% 0.0% Munich Re Underwriting Ltd Munich Re

O Crabtree

T Prifti,

R Hargreaves,

S Jedburgh,

R Chase,

C Franks,

A Carrier 0510 KLN 507.97 483.78 +5.0% 40.9% 20.2% 14.7% 24.3% R J Kiln & Company Ltd Kiln

A Carrier 0557 KCS 55.05 55.05 23.2% 18.4% 21.8% 36.6% R J Kiln & Company Ltd Kiln

N C Marsh 0570 ATR 165.00 165.00 -0.0% 17.3% 23.2% 16.3% 43.2% Atrium Underwriters Ltd Atrium

C E Dandridge 0609 AUW 180.00 160.00 +12.5% 16.4% 23.1% 17.1% 43.4% Atrium Underwriters Ltd Atrium

A F Beazley 0623 AFB 344.64 330.12 +4.4% 1.3% 47.2% 19.3% 32.1% Beazley Furlonge Ltd Beazley Fulonge

M J Meacock 0727 SAM 77.10 71.16 +8.4% 4.1% 30.1% 10.0% 55.9% S A Meacock & Company Ltd Meacock

B J Jackson 0779 CDL 30.00 20.00 +50.0% 13.8% 21.6% 0.0% 64.7% St Paul Syndicate Management Ltd St Paul's

P D Upton 0780 ADV 216.15 228.01 -5.2% 47.5% 15.8% 10.7% 26.0% Advent Underwriting Ltd Fairfax

S D Mathers 0807 SDM 113.24 87.10 +30.0% 33.8% 15.5% 25.9% 24.9% R J Kiln & Company Ltd Kiln

J D Robinson 0958 GSC 225.03 154.00 +46.1% 1.9% 34.3% 21.4% 42.5% Omega Underwriting Agents Ltd Omega

J D Neal 0980 JDN 83.16 83.16 3.5% 95.3% 0.2% 1.0% Ensign Managing Agency Ltd Ensign

M I C Simmonds 0994 SIM 40.00 40.45 -1.1% 100.0% 0.0% 0.0% 0.0% Imagine Managing Agency Ltd Imagine

J Butcher 1007 SVB 216.00 151.00 +43.0% 80.4% 4.2% 3.3% 12.1% SVB Syndicates Ltd SVB

C R O'Farrell 1036 COF 100.00 90.00 +11.1% 100.0% 0.0% 0.0% 0.0% Limit Underwriting Ltd QBE

H H Hayward 1084 CSL 400.25 101.78 +293.2% 85.1% 13.3% 0.0% 1.7% Chaucer Syndicates Ltd Chaucer

M Dawson 1176 COX 15.07 12.57 +19.9% 44.0% 9.9% 27.3% 18.8% Chaucer Syndicates Ltd Chaucer

C N R Atkin 1183 AGY 287.50 193.50 +48.6% 100.0% 0.0% 0.0% 0.0% Talbot Underwriting Ltd Talbot

L Rock 1200 ROC 118.35 80.00 +47.9% 25.7% 64.6% 0.3% 9.6% Heritage Managing Agency Ltd Heritage Consortium

M Manning 1206 GER 60.25 55.00 +9.5% 100.0% 0.0% 0.0% 0.0% Gerling at Lloyd's Ltd Gerling Global

N J Metcalf 1209 XL 340.00 340.00 100.0% 0.0% 0.0% 0.0% XL London Market Ltd XL Capital


Capacity Split of 2004 allocated capacity2004 2003 % Corporate “Unlimited”

Underwriter Syndicate £m £m Inc/Dec Aligned Unaligned MAPA Bespoke Agent OwnerS L Gordon 1218 ODY 145.00 115.00 +26.1% 100.0% 0.0% 0.0% 0.0% Newline Underwriting Management Ltd Fairfax

C Dingley 1221 MLM 150.00 125.00 +20.0% 97.4% 0.6% 0.0% 2.0% Navigators Underwriting Navigators Agency Ltd

P Thorpe-Apps 1225 AES 175.00 175.00 100.0% 0.0% 0.0% 0.0% AEGIS Managing Agency Ltd AEGIS ("AEGIS")

G F Johnstone 1231 FRW 55.29 55.29 60.0% 40.0% 0.0% 0.0% Jubilee Managing Agency Ltd Appleclaim

J R N Collyear 1243 EUL 251.68 350.00 -28.1% 100.0% 0.0% 0.0% 0.0% Euclidian Underwriting Ltd Euclidian

G Bignell 1245 JAT 35.72 38.22 -6.5% 10.9% 46.5% 0.0% 42.6% Heritage Managing Agency Ltd Heritage Consortium

P J Gage 1301 BGT 38.00 35.00 +8.6% 0.0% 100.0% 0.0% 0.0% Chaucer Syndicates Ltd Chaucer

M A Petzold 1400 DRE 80.00 100.00 -20.0% 100.0% 0.0% 0.0% 0.0% Danish Re Syndicates Ltd Trident Partnership

M R D Reith 1414 RTH 284.00 269.00 +5.6% 100.0% 0.0% 0.0% 0.0% Ascot Underwriting Ltd AIG

J H A Thomas 1607 JHA 33.00 10.85 +204.1% 9.1% 90.9% 0.0% 0.0% Creechurch Underwriting Ltd Creechurch

J A Henderson 1861 BRM 90.00 185.00 -51.4% 100.0% 0.0% 0.0% 0.0% Marlborough Underwriting Agency Ltd Berkshire Hathaway

A A Pitt 1923 CSM 12.50 12.50 0.0% 100.0% 0.0% 0.0% Imagine Managing Agency Ltd Imagine

A W Holt 2001 AML 1,000.00 1,000.00 100.0% 0.0% 0.0% 0.0% Amlin Underwriting Ltd Amlin

P D Brand 2003 SJC 500.00 450.00 +11.1% 100.0% 0.0% 0.0% 0.0% Catlin Underwriting Agencies Ltd Catlin Westgen

J Hamblin 2010 MMX 200.07 160.05 +25.0% 48.5% 15.3% 14.6% 21.6% Cathedral Underwriting Ltd Cathedral

D Foreman 2020 WEL 730.00 700.00 +4.3% 56.3% 12.6% 10.3% 20.9% Wellington Underwriting Agencies Ltd Wellington

J A Hyland 2121 HYL 62.12 33.64 +84.7% 53.7% 20.0% 11.1% 15.2% Sackville Syndicate Management Ltd SOC plc

A Hicks 2147 SVB 286.39 286.39 100.0% 0.0% 0.0% 0.0% SVB Syndicates Ltd SVB

S P Lotter 2468 MFM 99.40 57.30 +73.5% 54.7% 45.3% 0.0% 0.0% Marketform Managing Agency Ltd Marketform

R Pryce 2488 AGM 550.00 725.00 -24.1% 100.0% 0.0% 0.0% 0.0% Ace Underwriting Agencies Ltd ACE

D Pratt 2525 DLP 74.38 42.01 +77.1% 0.0% 43.8% 13.6% 42.6% Abacus Syndicates Ltd Amaranth Holdings

A Doré 2526 AGD 30.30 0.0% 68.4% 17.2% 14.5% Abacus Syndicates Ltd Amaranth Holdings

J H A Thomas 2607 TLT 15.20 19.50 -22.1% 100.0% 0.0% 0.0% 0.0% Creechurch Underwriting Ltd Creechurch

A F Beazley 2623 AFB 396.53 329.75 +20.3% 100.0% 0.0% 0.0% 0.0% Beazley Furlonge Ltd Beazley Fulonge

D E S Shipley 2791 MAP 325.90 325.91 -0.0% 57.1% 16.1% 9.1% 17.7% Managing Agency Partners Ltd Map Equity Ltd

D J Pye 2962 PYE 7.50 13.00 -42.3% 100.0% 0.0% 0.0% 0.0% Creechurch Underwriting Ltd Creechurch

S D Clapham 2987 BRT 500.00 500.00 100.0% 0.0% 0.0% 0.0% Brit Syndicates Ltd BRIT

P E Grove 2999 QBE 530.00 500.00 +6.0% 100.0% 0.0% 0.0% 0.0% Limit Underwriting Ltd QBE

G Albanese 3000 MKL 190.00 260.00 -26.9% 100.0% 0.0% 0.0% 0.0% Markel Syndicate Management Ltd Markel

D Warren 3210 MIT 316.00 250.00 +26.4% 0.0% 100.0% 0.0% 0.0% Chaucer Syndicates Ltd Chaucer

G Bignell 3245 LAW 50.27 43.6% 25.9% 0.7% 29.8% Heritage Managing Agency Ltd Heritage Consortium

D Burniston 4040 ILM 96.38 26.2% 32.5% 17.3% 24.0% Illium Managing Agency Ltd Illium Insurance Group

J A Giordano 4444 CNP 230.08 328.10 -29.9% 100.0% 0.0% 0.0% 0.0% Canopius Managing Agents Ltd Talisman

(Underwriting Director)

M P Hudson 5000 SPL 325.00 435.00 -25.3% 100.0% 0.0% 0.0% 0.0% St Paul Syndicate Management Ltd St Paul's

2004 14,961.22 +3.9% 74.0% 11.9% 4.7% 9.5%

2003 14,395.50 +18.0% 73.7% 11.9% 5.0% 9.5%

2002 12,196.32 +10.2% 72.9% 10.6% 6.7% 9.8%


Appendix 2Incidental syndicates

In addition to those syndicates listed in Appendix 1, thereare also a number of incidental or sub-syndicates that mayappear on Lloyd's slips. These incidentals are numbersadopted by the main syndicates for internal accounting andcontrol functions.

Incidental Syndicates

Incidental Incidental Incidental MainSyndicate Syndicate Syndicate SyndicateNo. Pseud Underwriter No. Managing Agent0566 STN P E Grove 2999 Limit Underwriting Ltd0626 IRK R S Childs 0033 Hiscox Syndicates Ltd0820 MWD A W Holt 2001 Amlin Underwriting Ltd0887 BDC A W Holt 2001 Amlin Underwriting Ltd1952N JJS G F Johnstone 1231 Jubilee Managing Agency Ltd2000 HAR M Harrington 2999 Limit Underwriting Ltd2245 MWL M Lawrence 1245 Heritage Managing Agency Ltd2724 SJG S J Gargrave 2999 Limit Underwriting Ltd2800* DRE M Petzold 1400 Danish Re Syndicates Ltd

Incidental Syndicates Ceasing

Incidental Incidental Incidental MainSyndicate Syndicate Syndicate SyndicateNo. Pseud Underwriter No. Managing Agent Notes0625 HER R S Childs 0033 Hiscox Syndicates Last underwrote in 20021010 WAH M Wheeler 1007 SVB Syndicates Incidentals of 1007, all ceasing at December 31, 20021115 MHW M Wheeler 1007 SVB Syndicates1203 HMW M Wheeler 1007 SVB Syndicates1234 CWS A Hicks 2147 SVB Syndicates Ceased at December 31, 20012750* TWK J Giordano / 0839 Trenwick Managing Ceased, following the Trenwick / Canopius restructuring

G Knowles Agents Ltd

N New incidental syndicate for 2004 year of account* A qualifying quota share syndicate, capitalised in accordance with Lloyd's rules, which writes a quota share of the main syndicate. (Not strictly anincidental syndicate).

As regards policyholders, the incidental number istransparent in that the security is identical to that of themain or 'parent' syndicate.

The incidental numbers currently in use at Lloyd's areas follows:


Appendix 3Cessations, mergers and new syndicates

New syndicates for 2004 year

Syndicate Underwriter Capacity (£m)2526 AGD A Doré 30.3 Abacus Syndicates Ltd

A professional indemnity syndicate that started trading on January 1, 2004. The syndicate isbacked primarily by corporate and individual names of CBS Private Capital Ltd, with virtually allof the £5 million balance provided by Converium Ltd. The agency is a subsidiary of CBSHoldings PLC. The underwriter, Andy Dore, was formerly of Professional Risks Insurance Ltd,which was acquired by Brit in 2003. The agency's chairman Bob Wallace, was formerly theunderwriter of Syndicate 0386.

3245 LAW G Bignell 50.3 Heritage Managing Agency LtdThis professional indemnity syndicate commenced underwriting on July 21, 2003. The accountwas effectively formerly written by Mark Lawrence, under the 2245 incidental syndicate divisionof syndicate 1245.

4040 ILM D Burniston 96.4 Illium Managing Agency LtdThis syndicate started trading on January 1, 2004, as a UK third party and employers' liabilitysyndicate. £25 million of capacity is provided by Houston Casualty Company, £15 million fromImagine Insurance, and £45 million from Hampden Agency Members. The underwriter, DenisBurniston, previously underwrote the UK liability account of Syndicate 0386.

4444 CNP JA Giordano 230.1 Canopius Managing Agents LtdIn effect, a re-numbering of Syndicate 839 following the restructuring and acquisition of theTrenwick operations at Lloyd's. The 2003 capacity of these operations was £328.1 million,including £113 million provided through the 2750 qualifying quota share syndicate backedby Berkshire Hathaway, which ceased at the year end. Effectively, 2750 provided thecapacity for the syndicate's major Aviation account.

Mergers

Syndicates Merged to Agent0587 1084 Chaucer Syndicates Ltd0962 1607 Creechurch Underwriting Ltd1096 1084 Chaucer Syndicates Ltd

Cessations

Syndicate Underwriter 2003 Capacity Agent0102 GOS P L Toomey 173.08 GoshawK Syndicate Management Ltd0389 NJA N J Allen 14.97 Brit Syndicates Ltd0839 TWK J A Giordano 215.10 * Trenwick Managing Agents Limited1204 JAN S J Helson 28.00 R J Kiln & Company Ltd2040 NEM T Sams 14.00 Brit Syndicates Ltd2241 DEX M J Bonds 17.40 Thomas Miller Managing Agency Ltd2750 TWK J A Giordano / G Knowles 113.00 ** Trenwick Managing Agents Limited3500 C Tayler 5.00 *** Kingsmead Underwriting Agency Ltd3579 S Lotter 22.50 ** Marketform Managing Agency LtdTotalTotalTotalTotalTotal 603.05 603.05 603.05 603.05 603.05

* Re-numbered as 4444 in 2004 following a restructuring.** Separately capitalised QQS Syndicates, ceasing Dec 31, 2003*** Set up on Sept 30, 2003 to assume the RITC of 2000 and prior open years of syndicates 506 and 271.


Appendix 4Capacity and alignment of managing agents

Number of Managed Capacity Aligned capacitySyndicates 2004 2003 2004 2003 2004 2003

Managing Agent managed £m £m £m £m % % Owner TypeAbacus Syndicates Ltd 2 104.68 42.01 - - - - Amaranth Holdings UK Non-listed

Ace Underwriting Agencies Ltd 1 550.00 725.00 550.00 725.00 100.0% 100.0% ACE Bermudan Insurer

Advent Underwriting Ltd 1 216.15 228.01 102.74 106.91 47.5% 46.9% Fairfax Other Insurer

AEGIS Managing Agency Ltd ("AEGIS") 1 175.00 175.00 175.00 175.00 100.0% 100.0% AEGIS Bermudan Insurer

Amlin Underwriting Ltd 1 1,000.00 1,000.00 1,000.00 861.40 100.0% 86.1% Amlin UK Listed

Ascot Underwriting Ltd 1 284.00 269.00 284.00 269.00 100.0% 100.0% AIG US Insurer

Atrium Underwriters Ltd 2 345.00 325.00 58.12 52.27 16.8% 16.1% Atrium UK Listed

Beazley Furlonge Ltd 2 741.17 659.87 401.08 329.75 54.1% 50.0% Beazley Furlonge UK Non-listed

Brit Syndicates Ltd 1 500.00 500.00 500.00 500.00 100.0% 100.0% BRIT UK Listed

Canopius Managing Agents Ltd 2 233.08 332.60 232.45 331.67 99.7% 99.7% Talisman Other Non-listed

Cathedral Underwriting Ltd 1 200.07 160.05 97.01 67.96 48.5% 42.5% Cathedral UK Non-listed

Catlin Underwriting Agencies Ltd 1 500.00 450.00 500.00 450.00 100.0% 100.0% Catlin Westgen Bermudan Insurer

Chaucer Syndicates Ltd 4 769.32 399.36 347.05 71.26 45.1% 17.8% Chaucer UK Listed

Cox Syndicate Management Ltd 1 433.23 433.23 251.67 251.67 58.1% 58.1% Cox UK Listed

Creechurch Underwriting Ltd 3 55.70 43.35 25.70 33.35 46.1% 76.9% Creechurch UK Non-listed

Danish Re Syndicates Ltd 1 80.00 100.00 80.00 100.00 100.0% 100.0% Trident Partnership Overseas Non-insurance

Ensign Managing Agency Ltd 2 242.08 242.08 57.91 57.86 23.9% 23.9% Ensign UK Non-listed

Euclidian Underwriting Ltd 1 251.68 350.00 251.68 350.00 100.0% 100.0% Euclidian UK Non-listed

Faraday Underwriting Ltd 1 400.00 400.00 400.00 400.00 100.0% 100.0% Berkshire Hathaway US Insurer

Gerling at Lloyd's Ltd 1 60.25 55.00 60.25 55.00 100.0% 100.0% Gerling Global Other Insurer

Hardy (Underwriting Agencies) Ltd 1 115.00 100.00 100.96 80.36 87.8% 80.4% Hardy UK Listed

Heritage Managing Agency Ltd 3 204.34 118.22 56.18 3.67 27.5% 3.1% Heritage Consortium UK Non-listed

Hiscox Syndicates Ltd 1 847.44 842.36 550.07 547.37 64.9% 65.0% Hiscox UK Listed

Illium Managing Agency Ltd 1 96.38 - 25.26 - 26.2% -- Illium Insurance Group UK Non-listed

Imagine Managing Agency Ltd 2 52.50 52.95 40.00 36.45 76.2% 68.8% Imagine Bermudan Insurer

Jubilee Managing Agency Ltd 1 55.29 55.29 33.17 - 60.0% - Appleclaim UK Non-listed

KGM Underwriting Agencies Ltd 1 34.16 34.16 16.41 6.00 48.0% 17.6% Perserverance Ltd UK Non-listed

Liberty Syndicate Management Ltd 2 794.00 430.00 794.00 430.00 100.0% 100.0% Liberty US Insurer

Limit Underwriting Ltd 3 1,130.00 1,039.97 902.90 812.69 79.9% 78.1% QBE Other Insurer

Managing Agency Partners Ltd 1 325.90 325.91 186.03 143.63 57.1% 44.1% Map Equity Ltd UK Non-listed

Markel Syndicate Management Ltd 1 190.00 260.00 190.00 260.00 100.0% 100.0% Markel US Insurer

Marketform Managing Agency Ltd 1 99.40 57.30 54.40 17.30 54.7% 30.2% Marketform UK Non-listed

Marlborough Underwriting Agency Ltd 1 90.00 185.00 90.00 185.00 100.0% 100.0% Berkshire Hathaway US Insurer

Munich Re Underwriting Ltd 1 230.00 225.00 230.00 225.00 100.0% 100.0% Munich Re Other Insurer

Navigators Underwriting Agency Ltd 1 150.00 125.00 146.16 121.80 97.4% 97.4% Navigators US Insurer

Newline Underwriting Management Ltd 1 145.00 115.00 145.00 115.00 100.0% 100.0% Fairfax Other Insurer

Omega Underwriting Agents Ltd 1 225.03 154.00 4.21 3.74 1.9% 2.4% Omega UK Non-listed

R J Kiln & Company Ltd 4 681.25 629.93 262.93 234.37 38.6% 37.2% Kiln UK Listed

S A Meacock & Company Ltd 1 77.10 71.16 3.13 2.91 4.1% 4.1% Meacock UK Non-listed

Sackville Syndicate Management Ltd 1 62.12 33.64 33.38 9.00 53.7% 26.8% SOC plc UK Non-listed

St Paul Syndicate Management Ltd 2 355.00 455.00 329.13 437.74 92.7% 96.2% St Paul's US Insurer

SVB Syndicates Ltd 2 502.39 437.39 460.05 405.84 91.6% 92.8% SVB UK Listed

Talbot Underwriting Ltd 1 287.50 193.50 287.50 193.50 100.0% 100.0% Talbot Bermudan Insurer

Wellington Underwriting Agencies Ltd 1 730.00 700.00 410.63 392.84 56.3% 56.1% Wellington UK Listed

XL London Market Ltd 1 340.00 340.00 340.00 340.00 100.0% 100.0% XL Capital Bermudan Insurer

Market total 2004 66 14,961.22 74.0%

Market total 2003 71 14,395.50 73.7%


Appendix 5Lloyd’s top 20 capital providers

Capital 2004 Capacity Capacity Growth 2004 Capital 2003 Capacity MarketProvider (£m) vs 2003 Market Share Provider (£m) ShareAmlin 1,000 + 16.0% 6.7% Amlin 861 6.0%QBE 918 + 9.0% 6.2% QBE 843 5.9%Liberty Mutual 794 + 85.0% 5.3% ACE 725 5.0%Hiscox 550 + 1.0% 3.7% Berkshire Hathaway 585 4.1%ACE 550 - 24.0% 3.7% Hiscox 547 3.8%Berkshire Hathaway 534 - 10.0% 3.6% BRIT 514 3.6%BRIT 500 - 3.0% 3.3% Catlin Westgen 450 3.1%Catlin 500 + 11.0% 3.3% SVB 442 3.1%SVB 460 + 13.0% 3.1% St Paul 438 3.0%Wellington 411 + 5.0% 2.7% Liberty Mutual 430 3.0%Beazley 401 + 22.0% 2.7% Wellington 393 2.7%Chaucer 347 + 23.0% 2.3% Euc Re 350 2.4%XL Capital 340 - 2.3% XL Capital 340 2.4%St Paul 329 - 25.0% 2.2% Trenwick 332 2.3%Mitsui Sumitomo 316 + 25.0% 2.1% Beazley Furlonge 330 2.3%Talbot 288 + 48.0% 1.9% Chaucer 281 2.0%AIG 284 + 6.0% 1.9% AIG 269 1.9%Kiln 263 + 11.0% 1.8% Markel 260 1.8%Canopius 252 - 24.0% 1.7% Mitsui 252 1.8%Cox 252 - 1.7% Cox 252 1.8%TTTTTop 20 - 2004op 20 - 2004op 20 - 2004op 20 - 2004op 20 - 2004 9,2899,2899,2899,2899,289 62.1%62.1%62.1%62.1%62.1% 8,8948,8948,8948,8948,894 61.8%61.8%61.8%61.8%61.8%


Appendix 6Market activity 2003-2004

20042004200420042004JunJunJunJunJun Wellington plans to expand into USWellington plans to expand into USWellington plans to expand into USWellington plans to expand into USWellington plans to expand into US

specialty insurance businessspecialty insurance businessspecialty insurance businessspecialty insurance businessspecialty insurance businessWellington Underwriting plc announced that thestock purchase agreement for the acquisition ofAXA Corporate Solutions Excess and Surplus LinesInsurance Company, was signed by both parties.The company being acquired is essentially a shellwith valid, current, authorizations to underwriteexcess and surplus lines business in 28 states acrossthe United States. The acquisition is subject toregulatory approval.Wellington Specialty Insurance Company, as thecompany will be called, will write a book ofbusiness which focuses on small direct, generalagency produced, commercial casualty andproperty business throughout the United States.Premium volume is expected to reach USD40million by the end of 2005. Funding of thepurchase and initial capital provision, expected tobe approximately USD40 million, will come fromWellington's own resources.

Euclidian plans £125 million IPOEuclidian plans £125 million IPOEuclidian plans £125 million IPOEuclidian plans £125 million IPOEuclidian plans £125 million IPOEuclidian Group intends to launch an estimated£125 million initial public offering on the LondonStock Exchange. Berkshire Hathaway is reported tohave agreed to take a 25 per cent stake inEuclidian when it floats.

M a yM a yM a yM a yM a y Hardy sells its stakHardy sells its stakHardy sells its stakHardy sells its stakHardy sells its stake in e in e in e in e in AtriumAtriumAtriumAtriumAtriumHardy underwriting sold its 23.2 per cent stake inAtrium Underwriting. Hardy Underwriting acquiredthe stake in Atrium in 2002.

AprAprAprAprApr Chubb sells its stakChubb sells its stakChubb sells its stakChubb sells its stakChubb sells its stake in Hiscoe in Hiscoe in Hiscoe in Hiscoe in HiscoxxxxxChubb sold its 27 per cent stake in Hiscox plcto a range of institutional investors receivingapproximately £90 million for its 54.5 millionshares. Chubb acquired its stake in Hiscox fromTrident in 1998.

Catlin announces price of initial publicCatlin announces price of initial publicCatlin announces price of initial publicCatlin announces price of initial publicCatlin announces price of initial publicoffer ingoffer ingoffer ingoffer ingoffer ingCatlin Group Limited announced an offer price of350 pence per share for its initial public offering ofcommon shares, and their admission to trading onthe London Stock Exchange plc's market for listedsecurities. At the offer price Catlin had a marketcapitalization of nearly USD1 billion (£539 million).

Amlin kAmlin kAmlin kAmlin kAmlin keeps under review potential foreeps under review potential foreeps under review potential foreeps under review potential foreeps under review potential forexpanding beyond Lloyd'sexpanding beyond Lloyd'sexpanding beyond Lloyd'sexpanding beyond Lloyd'sexpanding beyond Lloyd'sIn its annual report 2003, Amlin stated that its"growth may result in Amlin exceeding limitationsset by Lloyd's for any one of its franchisees, andscale benefits may outweigh the costs associatedwith Lloyd's mutuality". Amlin also reported how itexpects to generate significant positive cash flowover the next few years to give it the option ofinvesting surpluses in a new non-Lloyd's entity.


M a rM a rM a rM a rM a r MikMikMikMikMike Pritchard and team completese Pritchard and team completese Pritchard and team completese Pritchard and team completese Pritchard and team completesacquisition of Ensign Managing acquisition of Ensign Managing acquisition of Ensign Managing acquisition of Ensign Managing acquisition of Ensign Managing Agency andAgency andAgency andAgency andAgency andmanagement of syndicate 318management of syndicate 318management of syndicate 318management of syndicate 318management of syndicate 318Mike Pritchard and his management teamannounced that they had completed the acquisitionof Ensign Managing Agency Ltd, and with it, theright to manage M.S.F. Pritchard syndicate 318. Theagency has been renamed Beaufort UnderwritingAgency Ltd.

HiscoHiscoHiscoHiscoHiscox acquires renewx acquires renewx acquires renewx acquires renewx acquires renewal rightsal rightsal rightsal rightsal rightsHiscox plc announced that it has reached agreementwith Marlborough Underwriting Agency, a whollyowned subsidiary of Berkshire Hathaway, for therenewal rights for the majority of business currentlyplaced with Marlborough syndicate 1861. Thearrangement will take effect from April 1, 2004.Marlborough and Hiscox agreed that Hiscoxsyndicate 33 will offer renewal terms on businesswritten in the energy, marine and energy liability andcargo accounts, while Marlborough will retain themarine excess of loss account and the marine hullaccount. Hiscox will provide a quota sharereinsurance of the hull portfolio.

FFFFFebebebebeb Jubilee Managing Jubilee Managing Jubilee Managing Jubilee Managing Jubilee Managing Agency receives approvAgency receives approvAgency receives approvAgency receives approvAgency receives approvalalalalalJubilee Managing Agency Ltd was grantedauthorization by the Financial Services Authority(FSA) to act as a Lloyd's managing agency. The FSAalso authorized Guardian Holdings Ltd to acquire a40 per cent interest in the ultimate parent of themanaging agent. Jubilee Managing Agency managesLloyd's motor syndicate 1231, and its sub-syndicate1952 that trades as Jubilee Motor Policies and JJSFleet Underwriting respectively.

TTTTTrrrrransfer of household insuransfer of household insuransfer of household insuransfer of household insuransfer of household insurance fromance fromance fromance fromance fromSyndicate 2987 to Brit InsurSyndicate 2987 to Brit InsurSyndicate 2987 to Brit InsurSyndicate 2987 to Brit InsurSyndicate 2987 to Brit Insurance Limitedance Limitedance Limitedance Limitedance LimitedIn keeping with its stated strategy to move UKbusiness from its syndicate 2987 at Lloyd's to its FSAregulated insurance company, Brit Insurance Limited(BIL), Brit announced that all household insurancebusiness will now be underwritten by BIL. Despitethe change in legal counterparty for clients, allbusiness will still be underwritten and administeredby the existing team.

JJJJJananananan WWWWWellington to underwrite propertyellington to underwrite propertyellington to underwrite propertyellington to underwrite propertyellington to underwrite propertyreinsurreinsurreinsurreinsurreinsurance business in 2004ance business in 2004ance business in 2004ance business in 2004ance business in 2004Wellington syndicate 2020 is expecting tounderwrite up to £40 million of property reinsurancebusiness in 2004, following the ending of a non-compete agreement with Aspen Insurance Holdings.


Appendix 7Capital structure

Capital structureThe overall financial security of Lloyd's is based on a chainof security with four links, represented diagrammaticallybelow. The aggregate resources of all members of Lloyd's,and those of the Corporation of Lloyd's, as at December 31,2003, was declared at £29.7 billion. The total amount ofestimated current and future liabilities at the end of 2003was £18.1 billion. However, it is important to recognise thatLloyd's members underwrite severally, not jointly, and that,consequently, the security offered by a particular policy isdependent, firstly, upon the resources supporting theparticular syndicate, or syndicates that underwrote therisk, and, secondly, upon the resources of the Central Fundas a last resort.

1st Link: Members' Premiums Trust Funds (PTFs)All premiums and other monies received or receivable inconnection with the member's underwriting business areinitially paid into PTFs, managed by the managing agent ofthe syndicate concerned. Payments from these funds mayonly be made to meet permitted trust outgoings: claims,reinsurance premiums, underwriting expenses and the like,including funding overseas regulatory deposits. The vastmajority of claims are met from the first link in the Lloyd'schain of security.

2nd Link: Members' Funds at Lloyd's (FAL)All members must place assets at Lloyd's determined byLloyd's risk-based capital methodology, subject toprescribed minimum levels. These assets must be readilyrealisable and may include letters of credit and bank andother guarantees.

Minimum capital ratios for both individual and corporatemembers are set at 40 per cent of their overall premiumlimit (35 per cent for those members writing predominatelyUK motor business).

3rd Link: Other declared assetsThe third link is the other declared personal wealth ofindividual members and any assets other than funds atLloyd's of corporate members.

Individual members who show a minimum level ofpersonal wealth (i.e. funds at Lloyd's and other personalwealth) of £350,000 may reduce their net funds at Lloyd'srequirement by the amount of declared other personalwealth. This credit is limited to 20 per cent of the member'snet funds at Lloyd's requirement and must not reduce thenet funds at Lloyd's below 35 per cent of premium limit.

The value of any assets held by corporate membersoutside their funds at Lloyd's is not included in the amountof £278 million shown in the diagram. In addition,individual members of Lloyd's have other assets, notdeclared to Lloyd's, which are available to meet claims.

Traditionalmembers

Corporatemembers

£ millionend 2003

Premiums trustfunds

Premiums trustfunds

18,995

Funds at Lloyd's Funds at Lloyd's 9,659

Other declaredassets

278

Lloyd's central net assets(includes Central Fund of £711 million)

781


4th Link: Central net assetsThe fourth link includes the Central Fund assets resultingfrom annual contributions made by all members. A newCentral Fund has been established to be available - at thediscretion of the Council of Lloyd's - to meet policyholders'claims in the event of members being unable to meet theirunderwriting liabilities relating to 1993 and post non-lifebusiness and all life business.

The new Central Fund has been supported by a five-yearinsurance contract, which commenced in 1999 and expiredat the end of 2003. Features included:– an annual limit of cover of £350 million, subject to– an annual excess point of £100 million, and subject to– an aggregate maximum cover of £500 million over the

five year period.

The six insurers underwriting the cover were:– SR International Business Insurance Company Ltd

(a subsidiary of Swiss Re).– Employers Reinsurance Corporation (ERC).– St Paul International Insurance Company Ltd (St Paul).– International Insurance Company of Hannover Ltd

(a subsidiary of Hannover Re).– XL Mid Ocean Reinsurance Ltd (XL).– Federal Insurance Company (a subsidiary of Chubb).

Lloyd's expects claims under the policy will increase to atotal of £500 million during 2004. However, the insurersdispute their liability to meet the claims made under thepolicy. Lloyd's does not accept that the insurers havegrounds for disputing liability, and commenced arbitrationproceedings on April 2, 2003, under the terms of the policyfor recovery of the sums claimed from the insurers.

Central Fund assets may be supplemented by an extrathree per cent of members' current overall premium limitscallable from members' premium trust funds. In addition,the other assets of the Corporation, totalling £70 million,are available to meet underwriting liabilities in the lastresort.

Solvency controlsSince the beginning of the last century, Lloyd's has requiredan annual report of each member's underwriting position -the annual solvency test. The managing agent of eachsyndicate must estimate and provide for all current andfuture liabilities for each year of account. These liabilities(referred to as solvency reserves) are subject to a statementof actuarial opinion.

The Lloyd's solvency test has two stages:Firstly, each member's solvency position is calculated.

Each member must have sufficient assets - those held in thepremium trust funds, overseas regulatory deposits and fundsat Lloyd's - to cover their underwriting liabilities, and ontop of this an additional solvency margin. Broadlyspeaking this solvency margin, calculated individually foreach member, is the greater of 16 per cent of total annualpremium income or 23 per cent of annualised claimsincurred over a three-year period. Where a member'sassets are not sufficient to cover the aggregate of theirunderwriting liabilities and their solvency margin, themember has a solvency shortfall.

The second stage of the solvency test calculationrequires that Lloyd's central assets must be sufficient tocover the aggregate of all members' solvency shortfallscalculated at the solvency test date.

Lloyd's is required to maintain solvency on a continuousbasis, and the solvency position of each member - and thusof Lloyd's as a whole - is monitored on a regular basis. TheFinancial Services Authority (FSA) are advised of the resultsof this monitoring.

Where it is apparent, either from the solvency testingprocess or elsewhere, that a member is insolvent, Lloyd'swill take action in respect of that member in order toprotect policyholders, which will result in the memberhaving to cease underwriting unless new funds are providedby that member.

Each year, Lloyd's files a return - the Lloyd's Return -with the FSA. This return is intended to ensure Lloyd'sregulatory reporting requirements are in line with other UKinsurers, and is adapted where appropriate to reflect Lloyd'sunique structure. This return reports the results of the Lloyd'ssolvency test.


BackgroundThe Equitas Group is a group of limited liability companiesin whom Lloyd's has no ownership. It is independent ofLloyd's and outside the Lloyd's regulatory regime. Itsresults are not reflected in Lloyd's global results.

On September 4 1996, Equitas received authorisationto reinsure and run-off Lloyd's 1992 and prior years' non-life liabilities. Formed as part of the Reconstruction andRenewal plan, it is anticipated that it will take Equitas inexcess of 40 years to settle its asbestos, pollution andhealth hazard (APH) claims, with the remaining liabilitiesexpected to be settled in the next several years.

Appendix 8Equitas

Both Equitas Reinsurance Ltd and Equitas Ltd are authorisedand regulated by Financial Services Authority (FSA) toconduct reinsurance business, but not to underwrite newbusiness. Equitas Reinsurance Ltd reinsured the businesswritten in 1992 and prior years, and retroceded all itsbusiness to its wholly owned subsidiary, Equitas Limited.Those involved advise that the business was structured thisway for tax reasons.

Equitas Reinsurance Ltd, Equitas Ltd and the holdingcompany share the same board members. One member isnominated by Lloyd's and two by the Equitas Trust.

Owned by discretionary trust whose seven trustees are requiredto act with regard to the interest of reinsured Names

£11.2bn reinsurancepremium

£130m R&R costs

£710 capital£10.4bn retrocession

premium

Equitas Holdings Ltd

Equitas ReinsuranceManagement Services Ltd

Equitas PolicyholdersTrustee Ltd

Equitas Reinsurance Ltd

Names 1992 &prior liabilities

Lloyd's

Equitas


Equitas Reinsurance Ltd has wide powers to manage therun-off of the business it has reinsured and to pay claimsdirectly to underlying policyholders. It is also empoweredto collect under reinsurance policies of the syndicateswhose business it reinsured (involving nearly 250,000reinsurance contracts with approximately 3,000 reinsurersand 2,000 reinsurance "pools"). These powers and thebusiness itself have been retroceded to Equitas Ltd.Brokers deal exclusively with Equitas Ltd with regards tothe claims handling.

In recent years, Equitas has moved to consolidate allclaims and reinsurance processing activities in-house.Initially, the management of most of these services wascontracted out, often to Lloyd's managing agencies andspecialist companies. In early 2001, Equitas formed anin-house broking department to assume the collection ofreinsurance debt in cases where the broker that originallyplaced the business does not perform to the company'srequired standards.

If at any time the directors of Equitas determine thatthere are insufficient assets to meet liabilities in full as theyfall due, then, under the contract by which the Equitasgroup reinsured the 1992 and prior years’ liabilities, thedirectors may implement a proportionate cover plan.Under this plan, Equitas will be entitled to pay claims at areduced rate, and liabilities will be restricted in aggregateto assets available such that shareholders' funds wouldnot become negative - although they may be reducedto nil.


Notes

ContentsIntroduction 1Executive summary 22001 global results and forecast 3Capitalization 13Trends in capacity 16Lloyd’s Franchise implementation 24Regulatory and accounting environment 27Ratings 30Equitas 33

Appendices1. Syndicates active for 2004 year of account 352. Incidental syndicates 373. Cessations, mergers and new syndicates 384. Capacity and alignment of managing agents 395. Lloyd’s top 20 capital providers 406. Market activity 2003 – 2004 417. Capital Structure 438. Equitas 45

`çåí~Åí=ÇÉí~áäëFor further information please contact your account executive.For additional copies please contact the Reinsurance Publications Department.

Tel: +44 (0)20 7488 8093Fax: +44 (0)20 7488 8525E-mail: [email protected]

Willis LimitedTen Trinity SquareLondon EC3P 3AXUnited Kingdom

© Copyright 2004 Willis Limited All rights reserved : No part of this publication may be reproduced, stored in a retrieval system, or transmitted inany form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the permission of Willis Limited. The informationcontained in this report is compiled from sources we consider to be reliable; however, we do not guarantee and are not responsible for its accuracy.This report is for general guidance only and action should not be taken without obtaining specific advice.

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